Solar Stock Winners: German Elections Propel Stocks

(Solar winners story updated for Q-Cells commentary)

NEW YORK ( TheStreet) -- Solar stocks experienced a surge on election results in Germany, where Chancellor Angela Merkel's party suffered big losses, and with the German electorate citing anti-nuclear energy policy as a primary issue. The long-term implications of the Green Party election victories in Germany have to be viewed as a positive for green energy, but there are important short-term solar sector catalysts that could take away from the one-day surge in the days and weeks to come.

In the superficial rendering of German politics, Merkel's CDU party is the long-time friend of nuclear energy, and every time a new round of debate comes up over solar incentives in Germany, the solar industry has positioned the issue as "the nuclear lobby versus green energy."

There's some truth to this divide, according to solar analysts, and in the least it means that political debate becomes more favorable for renewables with energy policy and anti-nuclear sentiment clearly on the ascendant as talking points in German politics.

One particularly painful loss for Merkel's Christian Democrats came in the key industrial state of Baden-Wuerttemberg, where the Green Party unseated the conservative side of the German political spectrum, which had ruled for the past six decades.

In a sign of how important the nuclear issue was in the German elections, after the losses at the polls Chancellor Merkel said that the seven nuclear reactors that were taken offline for safety checks probably would not ever come back on line. As the Japanese nuclear crisis emerged, Merkel shut down seven of Germany's 17 nuclear plants and placed a moratorium on plans to extend the lifetime of nuclear plants, a move that was seen by critics as a campaign season flip-flop by Merkel and an attempt to avoid the election losses that her party ultimately suffered.

Jefferies noted that 45% of German voters polled put energy/environment policy as the most important criteria for their voting decision. There were also mass protests of as much as 200,000 to 250,000 people demonstrating across Germany on Saturday against nuclear power.

Jefferies also noted that the state of Baden-Wuerrtemberg, where the Greens achieved their historic victory, now owns 45% of Germany's third largest utility, after a "rushed acquisition decision in December which saw Baden-Wuerrtemberg purchase the French utility EdF's 45% stake in EnBW as rumours spread that EdF was going to sell its stake to Gazprom.... This leaves the Green Party in a very good position to close permanently the four nuclear power stations of EnBW and to influence its energy policy."

All solar stocks, from the German solar manufactures to the Chinese and U.S. solar companies, rallied on Monday after the German election results. German solar companies Conergy, Q-Cells, Solon and Solarworld were all up on Monday, with one-day returns between 8% and 12%, and Conergy leading the way. Q-Cells is scheduled to release its earnings on Tuesday.
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U.S. solar companies First Solar ( FSLR) and SunPower ( SPWRA) were up by 2% and 1% respectively, on Monday, much less than German counterparts but still finishing ahead of the general equities market, which ended Monday in the red. The U.S. solar stocks continued up on Tuesday by 2%, though on light volume.

Several of the Chinese solar stocks were up in the range of 4% to 7% on Monday, but the rally did not extend to a second day. JA Solar ( JASO) led the sector, up close to 7% at the close on Monday. Yingli Green Energy ( YGE) finished with the second-best run on Monday, up close to 6%. Jinko Solar ( JKS) was up 5%, and LDK Solar ( LDK) followed with a 4% gain on Monday.

A few Chinese solar stocks that suffered recent setbacks after weak earnings announcements had their best trading day since mid-month on Monday. ReneSola ( SOL), which had one of the biggest post-earnings declines in the solar sector, rose by 4% on Monday. Hanwha Solarone ( HSOL), which recently pre-reported a revenue miss (after having hiked revenue guidance just a few weeks ago), was up more than 4% on Monday also.

Mirroring the equities market trading action, volume in solar trading was not excessive during the Monday rally or on Tuesday when there was more limited bullishness in the solar trade. JA Solar was well above average daily volume of 10 million shares, with more than 13 million shares trading hands on Monday, but most solar stocks were at or below average trading volume levels. On Tuesday, trading in shares of First Solar and SunPower was only 50% of average volume.

The Green Party was responsible for the original legislation that brought renewable energy to the forefront of Germany's energy policy. More recently though, the Green Party has been willing to compromise over solar incentive tariffs, coming to the negotiating table with the solar industry on the mid-year 2011 cuts now in place. In the least, the Green Party has more leverage to pursue renewable energy policy, so the type of compromises it made in the past year on solar incentive cuts may not be a position it is forced into accepting as quickly.

Jefferies analysts wrote on Monday that, "the coalition government under Angela Merkel will now be under a lot of pressure and will have a minority in the upper house, the Bundesrat. We also note that the German FIT legislation is up for review later in the year. We believe that it will be exceptionally positive for the build-out of renewables."

For solar stocks, though, the gains made by the Green Party in Germany are still vague as they relate directly to German energy policy and are long-term in nature. As such, they need to be viewed against negative catalysts that still exist in the market for solar stocks in 2011.

On Tuesday, it was only the Chinese wafer makers ReneSola and LDK Solar rising with significant volume, as German solar company Q-Cells provided a 2011 outlook that outlined the divide between long-term bullishness on solar after the Japanese nuclear crisis and German elections, and the short-term fundamentals.

After its Tuesday guidance of flat year-over-year revenue, Q-Cells told Reuters that it does not see a short-term benefit for the solar industry from the gains made by the Green Party in Germany, a particularly sober read on the German election results from a company which should know the German market as well as any solar company. Solar stocks rallied on Monday after the German elections as the latest sentiment-driven trade in solar since the nuclear crisis in Japan unfolded. The German solar stocks, in particular, rallied strongly on the election results, but Q-Cells led them all down on Tuesday, declining by 6%.

Q-Cells CEO Nedim Cen told Reuters, "Germany alone will not be strong enough." The Q-Cells CEO also said that the nuclear crisis in Japan will not likely have a major global impact on the solar sector.

Sam Dubinsky, analyst at Wells Fargo Securities, pointed to the headline risk from Italy as a reason to shy away from getting too excited about solar's short-term prospects after the German election results. Italy is expected to reveal its plans to reduce solar incentive support any day, and if there is a lack of a grandfathering clause for current projects under the existing feed-in tariff scheme, or any kind of annual cap on installations in 2011, solar stocks could trade down. Additionally, Italy's deliberations have led to a slowdown in what had been solar's fastest growing market, with order freezes and cancellations, and pricing has deteriorated quickly in the solar supply chain, with the exception of polysilicon pricing.

"There are continual rumblings of downstream order cancellations due to Italy policy delays. Our own checks suggest fundamentals are weakening with pricing falling through most of the supply chain (excluding polysilicon)," the Wells Fargo analyst wrote on Monday.

Dubinsky said that while the pro renewables Green Party won elections in the important state of Baden-Württemberg, and this could improve the solar subsidy debate in Germany, Wells Fargo would not recommend that investors chase solar stocks. "Italy still needs to announce its new program (draft proposal expected this week; annual caps are a big risk); in addition, recent checks suggest fundamentals are softening for 2Q/3Q.... With Italy representing 20-30% of global solar demand, we believe investors are better off waiting for clarity on the next round of subsidy cuts before chasing the sector," the analyst wrote.
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Solar stocks already rallied once right after the Japanese nuclear disaster emerged, and right after having declined on fears of Italian solar subsidy risk. The German elections results and Italian solar policy deliberations reflect the best of times and worst of times for a sector reliant on European nation subsidy support. However, not being able to determine the specific gains to be made by solar in Germany as a result of the Greens victory, and still concerned about Italian solar policy, the Wells Fargo analyst ultimately comes back to the numbers.

Dubinsky concluded that while sector valuations are low (solar stocks trade 5-7X earnings and some are near asset value) it's too early to be constructive on the group. "We would prefer to wait for fundamentals to stabilize, Street numbers to reset to more conservative levels, or for Italy uncertainty to clear."

On Monday afternoon, a Reuters report quoted the Italian environment minister as saying that there will be a cap on the money to support solar installations beginning in 2012, not a cap on total megawatts installed. This idea has been debated for several weeks, and some early analyst estimates were assuming a $6 billion euro cap per year, which suggested it would equal 2 gigawatts of solar annually in Italy. The Reuters report did not quantify the monetary cap.

"From 2012 we will proceed ... without setting a cap on incentives in terms of annual megawatts but with a cap on a total of millions of euros (to be spent) until the end of incentives," Environment Minister Stefania Prestigiacomo told the news agency Ansa, according to Reuters.

The Italian government estimates that 8 gigawatts of solar installations, its original target for 2020 (which is it soon set to reach), will cost $35 billion euros.

The environment minister in Italy was also quoted on Monday saying that the Italian government would protect investments that were already in development but may not be grid-connected in time for mid-year 2011 FIT reductions. Some kind of grandfathering clause is a key issue for solar companies, including SunPower, which have projects underway and with finance predicated on existing FIT rates. "This will allow (investors) to overcome a series of problems which do not depend on those who have made investments," the environment minister stated in the Italian news report.

Developing a new energy paradigm and grid infrastructure is easier said than done, also, with baseload generation mix not easy, or cheap, to replace when it comes to nuclear versus solar and other renewable forms of energy. The higher cost of renewable energy generation and the costs associated with grid upgrades to handle the renewable energy loan are long-term issues that need to be worked out within the backdrop of less support for nuclear. Germany currently receives roughly 23% of its energy from nuclear power.

Jefferies wrote in its German election wrap on Monday that it believes new German energy policy will include a special provision for virtual power stations -- mixed asset power stations which can provide baseload power. The largest of these is currently 12.6MW in size and comprises solar (5.5MW), wind (12.6MW), biogas (4MW) and some hydro for storage purposes.

-- Written by Eric Rosenbaum from New York.


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